Lifting Lockdowns

StJohn Gardner, Chief Investment Officer, offers his views on ‘lifting lockdowns’ and the likely impact on economies, as several countries have extended lockdowns in Europe over the past fortnight, whilst others begin to lift measures slowly.

Despite many nations going to some lengths to increase capacity to care for COVID-19 patients (e.g. four NHS Nightingale Hospitals in the UK), it now seems governments in Europe are not prepared to use that capacity by allowing the infection rate to rise above R1. Consequently, it is likely we are some weeks away from restrictions being eased in earnest in Europe, with several countries having extended lockdowns over the past fortnight. As it becomes clearer that having had the virus does not promise future immunity and thus inability to infect others a second time, Governments’ priority is to prevent a second wave rather than quicken the pace at which herd immunity might have been reached, albeit within medically manageable boundaries.

Accordingly, the chance of a quick return to business as usual is off the cards as far as Europe is concerned. Italy, its initial epicentre, is only just announcing measures allowing the lockdown measures to be eased towards those that currently exist in the UK, i.e. parks re-opening, external exercise and take-away food allowed, police barriers removed. Second waves, suggested by some countries, extend freedoms to businesses more able to ensure social distancing and which will assist reducing the boredom and improve the well-being of those that remain locked down, such as garden centres, DIY stores, and hairdressers. In other models, sectors that are more economically important might be allowed to open first such as manufacturing, construction and logistics. Indeed we have begun to see this occur already with B&Q re-opening and some automobile factories re-starting a reduced production.

Schools would follow, but look unlikely to return until after the summer now, as even though the age group is significantly less at risk of mortality, they will have a high infection carrying capability back into numerous homes.

Each loosening will be gauged over a 2-3 week period before considering moving to the next phase. Restaurants, hospitality and leisure would be among the last. Restrictions on foreign travel could remain in place until testing measures and contact apps are more prevalent and trusted.

In contrast to Europe, certain US states do seem prepared to allow the numbers of infected people to rise as a necessary evil in regenerating their economies and avoiding unemployment accelerating, given the lack of furloughing schemes. Pent up demand for durable goods such as automobiles and household items due to aging capital stock (near post war time levels) and a relatively healthy consumer appetite, means a potentially sharp return of economic activity in this sector if allowed, and so these may be prioritised in the phasing.

As economies open up, there’s likely to be a significant variation in the performance of different sectors. Crucially, this will depend both on when the restrictions affecting different sectors are lifted but also on consumer behaviour, in particular, as we have seen in China, their likely reluctance to attend places where keeping ones distance is more difficult such as shops, bars and restaurants. We expect our active stock pickers to navigate the various scenarios successfully.